Lenders typically look at three criteria when considering a mortgage application. They include their applicants ability to repay the loan, the applicant’s character and the security pledged against the loan such as your don payment or securities such as real property.
Your lender will check with credit reporting agencies such as Equifax or TransUnion to make sure that you have handled past debt responsibly. They will check if you have repaid loans that were approved to you in the past? They will also check out your credit card debt and weather you make your payments on time, or if you are you consistently late? Your past performance in these areas will provide your lender with a good guess on how you’ll handle your mortgage commitment. If you are turned down for a mortgage based on credit history, be sure to ask the lender to help you create a plan to recover a good credit rating so that you can buy a home later.
As far as security is concerned, in most cases the property that you are borrowing money to purchase will provide ample security for the lender. If the lender feels that you are a high risk, they may ask you to guarantee other assets that you have or purchase additional mortgage insurance to protect themselves against default.
When it comes to your ability to repay the loan, the lender will want to confirm that you have enough income to service the debt. For most people that means they have full time employment. You’ll need to provide the lender with a verification of your income and possibly verification of your employment.
When a lender qualifies a mortgage applicant, they look at two key factors. The first is known as your Gross Debt Service Ratio (GDS) and the second is called your Total Debt Service Ratio (TDS).
Your GDS is the percentage of your gross income necessary to pay your mortgage payment, including principal and interest, your property taxes, and your utility bills. Most lenders will not allow you to use more than 32% of your gross monthly income to meet these expenses. So a borrower with a monthly income of $5,000.00 could spend up to $1,600.00 per month to repay the mortgage, utility costs and taxes. Caution! Many applicants are surprised at how much the bank will let you spend. Make sure you buy in a range that you can service comfortably. The last thing you want is to move into your dream home and find out you can’t really afford the mortgage, taxes and utility payments.
Your TDSR is the percentage of your gross income that is required to repay all of your debt. Most lenders will not allow you to exceed 42% in this area. In other words, your total monthly debt cannot exceed more than 42% of your total gross income. For this you’ll need to factor in car loans, credit cards, student loans and any other payments that would be considered debt. The same buyer that we looked at before, with a gross monthly income of $5,000.00 could spend up to $2,100.00 per month servicing all of his debt. If this buyer had a car payment of $450.00 per month, and a credit card with a minimum monthly payment of $200.00, they would only qualify to spend the remaining $1,450.00 per month to repay his mortgage, taxes and utilities.